RBI allows gold, forex to have a single open position limit
By Our Commodities Bureau | 12 Oct 2002
In its circular on sale of gold / silver / platinum dated 7 October 2002, sent to all banks authorised to import these metals, the RBI said: “[Bullion] banks need to have a single open position limit for both gold and foreign exchange. Banks may operate within the aggregate of the open position limits for foreign exchange and gold already approved by [the RBI]. In case there is a need for enhancement in the common open position limit, banks may approach the department for approval of such enhanced limit. In terms of our extant instructions, the open position limit would carry 100-per cent risk weight.”
As per the RBI’s earlier circular dated 4 March 1998, these banks were advised to lay down, with the approval of their boards, prudential limits on taking open position in gold and also to obtain the specific approval of the RBI for such limits. The latest circular, thus, removes this requirement and considers the open position in both gold and foreign exchange as one, giving clear indication that gold will now be treated similar to foreign currencies.
The latest move will have wider implications on the use and treatment of the precious yellow metal in India. The move is expected to see the emergence of trading in gold, both physical and gold certificates (paper gold as it is commonly known), not permitted currently. And gold would then be traded as forex is traded.
Also,
this is the first important step that finally infuses
life in the RBI’s relatively passive gold policy
and takes it further to permit forward trading in gold
which is expected to be allowed by the end of October
2002. An indication to this possible move was the RBI’s
mention of the Forward Contracts (Regulation) Act, 1952,
in the latest relaxed gold trading norms. Under the new
norms, banks can fix the price of the gold sold within
11 days against the five days earlier.
